Inheritance Tax: what can you do about it

Posted by: Nicola Macdonald, on October 20, 2016.

Inheritance Tax (IHT) is affecting more and more families nowadays and we’re often asked what can be done to avoid the taxman receiving thousands of pounds, rather than the family.

There are several things you can do to reduce the impact of IHT and here is a list of some of them.

1. Make a will
Who you leave your estate to makes a major difference in the IHT bill. (An ‘estate’ is all your worldly wealth.) For example, anything you leave to a spouse or registered civil partner is free from IHT. So a professionally drafted will is the first step in your estate planning.

2. Use your gift allowances
Each year, you can give away up to £3,000 free of IHT, but there are also other allowances that you can use too – such as when someone gets married. Making sure that you use your allowances can reduce tax liabilities, because it reduces the size of your estate.

3. Give away your surplus income
Do you get a regular income, such as a pension, and find that you don’t spend it all? If so, you can give away more than the £3,000 each year (free from IHT) because a regular gift of ‘surplus income’ is exempt from IHT.

4. Put money into your pension plan
If you have a pension fund and die before the age of 75, the death benefit can be paid to your heirs free of IHT and free of income tax. So a fringe benefit of funding for your retirement could be that you also protect the fund from IHT.

5. Make gifts to charities
Any money that you give to charities, during your lifetime and through your will, is exempt from IHT. In addition, lifetime gifts can usually be enhanced by Gift Aid and a large amount of charitable legacies could mean the rest of your estate qualifies for a reduced 36% rate of IHT (from 40%).

6. Qualify for business property relief /agricultural property relief
If you run a business or own a farm, that asset could qualify for 100% relief from IHT, depending on the circumstances.You could also buy certain small company shares or business interest as an investment or through your ISA and get the 100% relief – but this is a specialist area and needs careful consideration beforehand.

7. Put money in trust
Making gifts of substantial amounts can reduce your estate and the IHT bill, but to qualify you have to live for a further seven years.You can just simply give the money away to the family, of course, but do you trust them not to simply spend it all straight away? That’s why many people gift money to trusts, a legal arrangement of ownership, rather than just hand the money over. You can also put money into certain trusts that will allow you to receive regular payments from the trust fund, if you need that.

8. Take out life insurance
If you do not want to give money away, or put it in trust, then you could consider taking out a life assurance policy and putting in trust. When the policy pays out on your death, the proceeds can then be used to mitigate the tax bill. This doesn’t actually save any IHT of course, it simply means that you will pay a regular monthly or yearly amount to an insurance company and an amount equal to the tax due on your estate can pass in its entirety to your heirs.

9. Ask for advice!
Estate planning is a complex area and doing the wrong thing could be costly. Make sure you contact a professional adviser before you sign anything or part with any money. And of course, I’m more than happy to guide you in estate planning!

Next steps…
By its very nature, this is simply a brief overview and has possible raised some questions in your mind. It is extremely important to understand what is involved before you take any action.

To help answer your questions we are holding a free seminar on 1st December.

For more details and to reserve your place: Modern Inheritance Tax Planning – The very latest do’s and don’ts.


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